Your car insurance could be set to soar by an average of £75 per year, due to a new government ruling.

The Ministry of Justice has announced a new formula for calculating compensation payments for those who suffer long-term injuries.

The legislation came into force on March 20, 2017, with the first wave of impact on insurance costs already being felt.

For young drivers, the changes could cause massive increases in premiums – potentially up to an extra £1,000 per year, according to accountancy firm PwC.

Older drivers could see an increase of £300 per year.

‘We anticipate an increase of £50-£75 on an average comprehensive motor insurance policy, with higher increases for younger and older drivers - potentially up to £1,000 for younger drivers, and a rise of up to £300 for older drivers,’ said Mohammad Khan, UK general insurance leader at PwC.

The Lord Chancellor announced the change to what is known as the ‘discount rate’, which is a figure used to help set compensation pay-outs when people suffer serious injuries. It has been reduced from 2.5% to -0.75%, effective from 20 March 2017.

Reducing the rate means more money for accident victims, but a higher cost for the insurer – which means the costs are passed on to all car drivers.

Huw Evans, Director General of the Association of British Insurers, said: ‘Cutting the discount rate is a crazy decision.

‘Claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK. We estimate that up to 36 million individual and business motor insurance policies could be affected in order to over-compensate a few thousand claimants a year.’

The Ministry of Justice will now launch a consultation on how the system can be made fairer.

It said it would bring forward any necessary legislation ‘at an early stage’.

In the meantime, it has made it clear it had no choice but to change the discount rate, according to the existing law.

‘The law is absolutely clear - as Lord Chancellor, I must make sure the right rate is set to compensate claimants,’ said Liz Truss, the Lord Chancellor and Justice Secretary.

Jon Morrell, CEO of mustard.co.uk, said: ‘This latest change to premiums once again demonstrates the importance of the service provided by price comparison sites. We can’t control the prices charged by insurance companies, but we can provide a service that helps consumers compare prices and we would always encourage consumers to shop around.’

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